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AHGP > SEC Filings for AHGP > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ALLIANCE HOLDINGS GP, L.P.

Form 10-Q for ALLIANCE HOLDINGS GP, L.P.


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:

References to "we," "us," "our" or "AHGP" mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.
References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, which include Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries.
References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., also referred to as our general partner.
References to "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.
References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.
References to "MGP" mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P.
References to "SGP" mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P.
References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.
References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P.

Summary

Our cash flows currently consist primarily of distributions from ARLP for our ARLP partnership interests, including the incentive distribution rights that we own. We reflect our ownership interest in the ARLP Partnership on a consolidated basis, which means that our financial results are combined with the ARLP Partnership's financial results and the results of our other subsidiaries. The earnings of the ARLP Partnership allocated to its limited partners' interest not owned by us and allocated to SGP's general partner interest in ARLP are reflected as a noncontrolling interest in our condensed consolidated statement of income and balance sheet. In addition to the ARLP Partnership, our results of operations include the results of operations of MGP, our wholly-owned subsidiary.

The AHGP Partnership's results of operations principally reflect the results of operations of the ARLP Partnership adjusted for noncontrolling partners' interest in the ARLP Partnership's net income. Accordingly, the discussion of our financial position and results of operations in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the operating activities and results of operations of the ARLP Partnership.

The ARLP Partnership is a diversified producer and marketer of coal primarily to major United States ("U.S.") utilities and industrial users. The ARLP Partnership began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become the third largest coal producer in the eastern U.S. The ARLP Partnership operates ten underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia and it operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. The development of an additional mine (the "Gibson South mine") at the ARLP Partnership's southern Indiana Gibson County Coal, LLC mining complex ("Gibson County


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Coal") continues and includes incidental production which began in April 2014. Also, the ARLP Partnership owns a preferred equity interest and is making additional equity investments in White Oak Resources LLC ("White Oak") and is purchasing and funding development of reserves and has constructed and is operating surface facilities at White Oak's new longwall mining complex in southern Illinois. As is customary in the coal industry, the ARLP Partnership has entered into long-term coal supply agreements with many of its customers.

We have four reportable segments: Illinois Basin, Appalachia, White Oak and Other and Corporate. The first two reportable segments correspond to major coal producing regions in the eastern U.S. Factors similarly affecting financial performance of the operating segments within each of these two reportable segments generally include coal quality, geology, coal marketing opportunities, mining and transportation methods and regulatory issues. The White Oak segment includes activities associated with the White Oak longwall Mine No. 1 development project in southern Illinois more fully described below.

Illinois Basin reportable segment is comprised of multiple operating segments, including Webster County Coal, LLC's Dotiki mining complex ("Dotiki"), Gibson County Coal, which includes the Gibson North mine and Gibson South mine, Hopkins County Coal, LLC mining complex ("Hopkins"), which includes the Elk Creek mine and the Fies property, White County Coal, LLC's Pattiki mining complex ("Pattiki"), Warrior Coal, LLC's mining complex ("Warrior"), Sebree Mining, LLC's mining complex ("Sebree"), which includes the Onton mine, Steamport, LLC and certain undeveloped coal reserves, River View Coal, LLC's mining complex ("River View"), CR Services, LLC, and certain properties of Alliance Resource Properties, LLC ("Alliance Resource Properties"), ARP Sebree, LLC and ARP Sebree South, LLC. The development of the Gibson South mine continues and includes incidental production which began in April 2014. The ARLP Partnership is in the process of permitting the Sebree and Fies properties for future mine development.

Appalachian reportable segment is comprised of multiple operating segments, including the Mettiki mining complex ("Mettiki"), the Tunnel Ridge, LLC mining complex ("Tunnel Ridge"), the MC Mining, LLC mining complex ("MC Mining") and the Penn Ridge Coal, LLC ("Penn Ridge") property. The Mettiki mining complex includes Mettiki Coal (WV), LLC's Mountain View mine, Mettiki Coal, LLC's preparation plant and a small third-party mining operation which has been idled since July 2013. The ARLP Partnership is in the process of permitting the Penn Ridge property for future mine development.

White Oak reportable segment is comprised of two operating segments, Alliance WOR Properties, LLC ("WOR Properties") and Alliance WOR Processing, LLC ("WOR Processing"). WOR Properties owns reserves acquired from White Oak and is committed to acquiring additional reserves from White Oak under lease-back arrangements. WOR Properties has also provided, and is continuing to provide, certain funding to White Oak for development of these reserves. WOR Processing includes both the surface operations at White Oak and the equity investments the ARLP Partnership is making in White Oak. The White Oak reportable segment also includes a loan to White Oak from the Intermediate Partnership to construct certain surface facilities. For more information on White Oak, please read "Item
1. Financial Statements (Unaudited) - Note 6. White Oak Transactions" of this Quarterly Report on Form 10-Q.

Other and Corporate segment includes marketing and administrative expenses, Alliance Service, Inc. ("ASI") and its subsidiary, Matrix Design Group, LLC ("Matrix Design"), Alliance Design Group, LLC, ASI's ownership of aircraft, the Mt. Vernon Transfer Terminal, LLC ("Mt. Vernon") dock activities, coal brokerage activity, the ARLP Partnership's equity investment in Mid-America Carbonates, LLC ("MAC"), certain activities of Alliance Resource Properties and the Pontiki Coal, LLC mining complex ("Pontiki") which ceased operations in November 2013 and sold most of its assets in May 2014.


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As a result of a change in our reportable segments in 2014, certain reclassifications of 2013 segment information have been made to conform to the 2014 presentation. These reclassifications include changes to the Appalachian segment and Other and Corporate segment.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

We reported record net income of $137.1 million for the three months ended June 30, 2014 ("2014 Quarter") compared to $103.6 million for the three months ended June 30, 2013 ("2013 Quarter"). This increase of $33.5 million was principally due to record sales volumes, which rose to 10.4 million tons sold in the 2014 Quarter compared to 9.8 million tons sold in the 2013 Quarter. The increase in tons sold resulted from increased volumes at the Tunnel Ridge mine, the start-up of coal production at the Gibson South mine and increased sales at the Dotiki, Gibson North, River View and MC Mining mines. Although the ARLP Partnership had record tons sold, coal production volumes decreased 3.5% to 9.8 million tons in the 2014 Quarter, primarily due to the Warrior mine's continued transition to a new mining area and the absence of production at the Pontiki mine. Higher operating expenses during the 2014 Quarter primarily resulted from increased sales volumes, which particularly impacted sales-related expenses, and sales from coal inventories compared to the 2013 Quarter.

                                                     Three Months Ended June 30,
                                                  2014       2013      2014      2013
                                                  (in thousands)       (per ton sold)
Tons sold                                         10,362      9,817       N/A      N/A
Tons produced                                      9,761     10,120       N/A      N/A
Coal sales                                      $575,191   $541,574    $55.51   $55.17
Operating expenses and outside coal purchases   $352,895   $348,227    $34.06   $35.47

Coal sales. Coal sales for the 2014 Quarter increased 6.2% to $575.2 million from $541.6 million for the 2013 Quarter. The increase of $33.6 million in coal sales reflected the benefit of record tons sold (contributing $30.1 million in additional coal sales) and higher average coal sales prices (contributing $3.5 million in coal sales). Average coal sales prices increased $0.34 per ton sold in the 2014 Quarter to $55.51 per ton sold as compared to $55.17 per ton sold in the 2013 Quarter, primarily as a result of higher priced coal sales at the Mettiki and Tunnel Ridge mines.

Operating expenses and outside coal purchases. Operating expenses and outside coal purchases increased slightly to $352.9 million for the 2014 Quarter from $348.2 million for the 2013 Quarter, primarily due to increased coal sales volumes. On a per ton basis, operating expenses and outside coal purchases decreased 4.0% to $34.06 per ton sold primarily due to the favorable impact of increased lower-cost production at the Tunnel Ridge mine, reduced cost per ton at the Dotiki and MC Mining mines and the absence of higher cost production at the Pontiki mine discussed above. Operating expenses were impacted by various other factors in addition to record sales volumes, the most significant of which are discussed below:

Workers compensation expenses per ton produced decreased to $0.30 per ton in the 2014 Quarter from $0.69 per ton in the 2013 Quarter. The decrease of $0.39 per ton produced resulted primarily from favorable claim trends offset partially by a decrease in the discount rate used to calculate the estimated present value of future obligations;


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Contract mining expenses decreased $1.9 million in the 2014 Quarter compared to the 2013 Quarter. The decrease reflects lower production from a third-party mining operation in the Appalachian region due to reduced metallurgical coal export market opportunities;

Operating expenses for the 2014 Quarter benefited from insurance proceeds of $7.0 million related to claims from the adverse geological event at the Onton mine in the third quarter of 2013; and

Operating expenses also benefited in the 2014 Quarter from a gain of $4.4 million recognized on the sale of Pontiki's assets. In May 2014, Pontiki completed the sale of most of its assets, including certain coal reserves, mining equipment and infrastructure and surface facilities. In consideration for the purchase, the buyer assumed certain liabilities of Pontiki, including asset retirement obligations and agreed to pay Pontiki an overriding royalty for coal mined from the acquired reserves and certain additional fees on a per ton basis for future coal processing. The buyer's additional fees on a per ton basis have agreed upon minimum amounts which was recorded as a receivable in our condensed consolidated balance sheet and is reflected in the gain discussed above.

Operating expenses and outside coal purchases per ton decreases discussed above were offset partially by the following increases:

Labor and benefit expenses per ton produced, excluding workers' compensation, increased 2.3% to $11.77 per ton in the 2014 Quarter from $11.50 per ton in the 2013 Quarter. This increase of $0.27 per ton was primarily attributable to decreased production discussed above, higher labor cost per ton resulting from decreased coal recoveries at the Warrior mine due to its continued transition to a new mining area, higher cost per ton incidental production during the development phase of the Gibson South mine and the timing of mine vacation days;

Materials and supplies expenses per ton produced increased 1.6% to $11.71 per ton in the 2014 Quarter from $11.52 per ton in the 2013 Quarter. The increase of $0.19 per ton produced resulted primarily from decreased production discussed above and an increase in cost for certain products and services, primarily ventilation-related materials and supplies (increase of $0.32 per ton), various preparation plant expenses (increase of $0.13 per ton) and power and fuel used in the mining process (increase of $0.15 per ton) offset partially by lower longwall subsidence expense (decrease of $0.26 per ton) and contract labor used in the mining process (decrease of $0.17 per ton); and

Operating expenses increased due to a significant reduction in coal inventory for the 2014 Quarter reflecting higher coal sales, whereas the 2013 Quarter experienced an increase in coal inventory. Increased operating expense due to the significant reduction in coal inventory was partially offset by the benefit of lower cost per ton beginning coal inventory for the 2014 Quarter, particularly in the Appalachian region.

Other sales and operating revenues. Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, Matrix Design sales, throughput fees received from White Oak and other outside services. Other sales and operating revenues increased to $17.5 million in the 2014 Quarter from $6.9 million in the 2013 Quarter. The increase of $10.5 million was primarily due to increased White Oak throughput fees and payments in lieu of shipments received from a customer in the 2014 Quarter related to an Appalachian coal sales contract.


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Depreciation, depletion and amortization. Depreciation, depletion and amortization expense decreased to $67.1 million for the 2014 Quarter from $68.2 million for the 2013 Quarter. The decrease of $1.1 million was attributable to the extension of the Mettiki mine's expected life due to the acquisition of additional coal reserves during 2013 as well as the closure of the Pontiki mining complex in late 2013, offset in part by depreciation increases related to increased sales volumes mentioned above, as well as capital expenditures related to production expansion and infrastructure investments at various operations.

General and administrative. General and administrative expense for the 2014 Quarter increased to $20.3 million compared to $17.0 million in the 2013 Quarter. The increase of $3.3 million was primarily due to higher incentive compensation expenses and other professional services.

Interest expense. Interest expense, net of capitalized interest, increased to $8.7 million for the 2014 Quarter from $6.2 million for the 2013 Quarter. The increase of $2.5 million in the 2014 Quarter was principally attributable to lower capitalized interest on the ARLP Partnership's equity investment in White Oak. Interest payable under the term loan and revolving credit facility is discussed below under "-Debt Obligations."

Equity in loss of affiliates, net. Equity in loss of affiliates, net includes the ARLP Partnership's equity investments in MAC and White Oak. For the 2014 Quarter, equity in loss of affiliates was $7.4 million compared to $5.7 million for the 2013 Quarter, which was primarily attributable to losses allocated to the ARLP Partnership from its equity investment in White Oak.

Net income attributable to noncontrolling interests. The noncontrolling interests balance is comprised of non-affiliate and affiliate ownership interests in the net assets of the ARLP Partnership that we consolidate. The noncontrolling interest designated as Affiliate represents SGP's 0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership. The noncontrolling interest designated as Non-Affiliates represents the limited partners' interest in ARLP controlled through the common unit ownership, excluding the 31,088,338 common units of ARLP held by us. The net income attributable to noncontrolling interest was $59.7 million and $42.6 million for the 2014 and 2013 Quarters, respectively. The increase in net income attributable to noncontrolling interest is due to the increase in the consolidated net income of the ARLP Partnership resulting from the changes in revenues and expenses described above, partially offset by an increase in ARLP's priority distribution to the MGP, which is deducted from ARLP's net income in the allocation of net income attributable to noncontrolling interest.


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Segment Adjusted EBITDA. Our 2014 Quarter Segment Adjusted EBITDA increased $37.8 million, or 19.4%, to a record $232.7 million from the 2013 Quarter Segment Adjusted EBITDA of $194.9 million. Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

                                                Three Months Ended
                                                     June 30,
                                                2014          2013         Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                $ 165,859     $ 164,623     $     1,236        0.8%
Appalachia                                       67,089        34,120          32,969       96.6%
White Oak                                       (4,915)       (6,295)           1,380       21.9%
Other and Corporate                               4,676         2,486           2,190       88.1%
Elimination                                           -             -               -           -
Total Segment Adjusted EBITDA (2)             $ 232,709     $ 194,934     $    37,775       19.4%

Tons sold
Illinois Basin                                    8,014         7,547             467        6.2%
Appalachia                                        2,348         2,091             257       12.3%
White Oak                                             -             -               -           -
Other and Corporate                                   -           195           (195)         (1)
Elimination                                           -          (16)              16         (1)
Total tons sold                                  10,362         9,817             545        5.6%

Coal sales
Illinois Basin                                $ 420,924     $ 397,364     $    23,560        5.9%
Appalachia                                      154,107       129,688          24,419       18.8%
White Oak                                             -             -               -           -
Other and Corporate                                 160        15,530        (15,370)     (99.0)%
Elimination                                           -       (1,008)           1,008         (1)
Total coal sales                              $ 575,191     $ 541,574     $    33,617        6.2%

Other sales and operating revenues
Illinois Basin                                $     877     $     963     $      (86)      (8.9)%
Appalachia                                        6,900           984           5,916         (1)
White Oak                                         4,169             -           4,169         (1)
Other and Corporate                               7,932         8,900           (968)     (10.9)%
Elimination                                     (2,415)       (3,914)           1,499       38.3%
Total other sales and operating revenues      $  17,463     $   6,933     $    10,530         (1)

Segment Adjusted EBITDA Expense
Illinois Basin                                $ 255,942     $ 233,703     $    22,239        9.5%
Appalachia                                       93,917        96,553         (2,636)      (2.7)%
White Oak                                         1,625           427           1,198         (1)
Other and Corporate                               3,503        22,113        (18,610)     (84.2)%
Elimination                                     (2,415)       (4,922)           2,507       50.9%
Total Segment Adjusted EBITDA Expense (3)     $ 352,572     $ 347,874     $     4,698        1.4%

(1) Percentage change was greater than or equal to 100%.

(2) Segment Adjusted EBITDA, which is not a generally accepted accounting principles ("GAAP") financial measure, is defined as EBITDA, excluding general and administrative expense. EBITDA is


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defined as net income (prior to the allocation of noncontrolling interest) before net interest expense, income taxes and depreciation, depletion and amortization. Segment Adjusted EBITDA is a key component of consolidated EBITDA, which is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

the financial performance of the ARLP Partnership's assets without regard to financing methods, capital structure or historical cost basis;

the ability of the ARLP Partnership's assets to generate cash sufficient to pay interest costs and support its indebtedness;

the ARLP Partnership's operating performance and return on investment compared to those of other companies in the coal energy sector, without regard to financing or capital structures; and

the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the previous explanation of consolidated EBITDA. In addition, the exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses, which are primarily controlled by our segments.

The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income, the most comparable GAAP financial measure (in thousands):

                                             Three Months Ended
                                                  June 30,
                                              2014         2013

Segment Adjusted EBITDA                     $ 232,709    $ 194,934

General and administrative                   (20,268)     (17,006)
Depreciation, depletion and amortization     (67,052)     (68,207)
Interest expense, net                         (8,331)      (6,040)
Income tax expense                                  -        (108)
Net income                                  $ 137,058    $ 103,573

(3) Segment Adjusted EBITDA Expense (a non-GAAP financial measure) includes operating expenses, outside coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers and, consequently, it does not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by the ARLP Partnership's management to assess the operating performance of the segments. Segment Adjusted EBITDA Expense is a key component of Segment Adjusted EBITDA in addition to coal sales and other sales and operating revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to the ARLP Partnership's operating expenses. Outside coal purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside coal purchases.


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The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to operating expense, the most comparable GAAP financial measure (in thousands):

                                                              Three Months Ended
                                                                   June 30,
                                                             2014           2013

Segment Adjusted EBITDA Expense                            $  352,572     $  347,874

Outside coal purchases                                            (2)          (790)
Other income                                                      323            353
Operating expenses (excluding depreciation, depletion
and amortization)                                          $  352,893     $  347,437

Illinois Basin - Segment Adjusted EBITDA increased 0.8% to $165.9 million in the 2014 Quarter from $164.6 million in the 2013 Quarter. The increase of $1.2 million was primarily attributable to increased tons sold, which increased 6.2% to 8.0 million tons in the 2014 Quarter. Coal sales increased 5.9% to $420.9 million compared to $397.4 million in the 2013 Quarter. The increase of $23.5 million reflects increased tons produced and sold from the Dotiki, River View and Gibson North mines and the start-up of production at the Gibson South mine in April 2014, offset partially by a slightly lower average coal sales price of $52.52 per ton sold during the 2014 Quarter compared to $52.65 per ton sold in the 2013 Quarter. Segment Adjusted EBITDA Expense increased 9.5% to $255.9 million in the 2014 Quarter from $233.7 million in the 2013 Quarter and . . .

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